CHILI'S RESTAURANT ACQUISITION

3 Months Ended

Sep. 25, 2019

On September 5, 2019, we completed the acquisition of certain assets and liabilities relating to 116 franchised Chili’s restaurants, owned by a franchisee, located in the Midwest United States. Pro-forma financial information of the acquisition is not presented due to the immaterial impact of the financial results of the acquired restaurants in the Consolidated Financial Statements (Unaudited).

The total purchase price of $99.0 million, excluding post-closing adjustments, was funded with borrowings from our existing credit facility. We accounted for this acquisition as a business combination. The results of operations, and assets and liabilities, of these restaurants are included in the Consolidated Financial Statements (Unaudited) from the date of purchase. The assets and liabilities of these restaurants were recorded at their preliminary fair values and are subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. The final purchase price allocation is expected to be completed during the second quarter of fiscal 2020.

The acquired restaurants are expected to generate approximately $300.0 million of annualized revenues which will be partially offset by the loss of average annualized royalty and advertising revenues of approximately $22.0 million. During the three week period ended September 25, 2019, these restaurants generated $15.3 million of revenue.

A net acquisition-related gain of $0.5 million was recorded during the thirteen week period ended September 25, 2019 to Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited). The net gain consisted of $2.6 million of franchise deferred revenue balances that were fully recognized at date of sale, partially offset by $1.5 million of professional services and transaction costs associated with the purchase, and $0.6 million of related franchise straight-line rent balances, net of market leasehold improvement adjustments, also fully recognized at the date of purchase.

The fair value of tangible and intangible assets acquired was primarily based on significant inputs not observable in an active market, including estimates of replacement costs, future cash flows, and discount rates. These inputs represent Level 3 fair value measurements as defined under GAAP. The preliminary amounts recorded for the fair value of acquired assets and liabilities at the acquisition date are as follows:



	Fair Value September 5, 2019
Current assets⁽¹⁾	$	7.3
Property and equipment	60.6
Operating lease assets	163.7
Reacquired franchise rights⁽²⁾	6.5
Goodwill⁽³⁾	24.3
Other assets	1.1
Total assets acquired	263.5
Current liabilities⁽⁴⁾	10.2
Operating lease liabilities, less current portion	158.3
Total liabilities assumed	168.5
Net assets acquired⁽⁵⁾	$	95.0


⁽¹⁾	Current assets included petty cash, inventory, and restaurant supplies.


⁽²⁾	Reacquired franchise rights have a weighted average amortization period of approximately 8 years.


⁽³⁾	Goodwill of $24.3 million is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents the benefits expected as a result of the acquisition, including sales and unit growth opportunities, and the benefit of the assembled workforce of the acquired restaurants.


⁽⁴⁾	Current liabilities included current portion of operating lease liabilities, gift card liability and accrued property tax.

⁽⁵⁾

Net assets acquired at fair value is equal to total purchase price of $99.0 million, less $1.6 million of closing adjustments and $2.8 million allocated to prepayment of leases entered into between us and the franchisee (refer to Note 3 - Leases for more information), partially offset by $0.4 million related to favorable market valuation adjustment recognized on pre-existing subleases that were terminated on the transaction date.